Shale Plays Gone Wild - The Bakken Shale

Most energy investors are familiar with unconventional resource plays, in particular, the shale areas that have come to dominate drilling in North America over the last decade. Although most of these shale areas produce natural gas, the Bakken Shale produces oil.

GeologyThe Bakken Shale is located in the Williston Basin, which straddles the North Dakota-Montana border and extends northward into Canada. The shale is composed of upper, middle and lower zones at depths from 9,000 to 10,500 feet. Wells drilled here typically are completed using multiple hydraulic fracturing techniques and horizontal lateral drilling.

Estimates vary concerning how much oil is recoverable in the Bakken Shale due to the early stage of the shale play and the inherent difficulty in making estimates of oil or natural gas resources. In April 2008, the U.S. Geological Service (USGS) estimated that the U.S. portion contains recoverable resources in a range of 3.0 to 4.3 billion barrels, with a mean estimate of 3.65 billion barrels. In 1995, the USGS estimated that only 151 million barrels were in the area.

The PlayersContinental Resources (NYSE:CLR) is a large acreage holder in the Bakken Shale with 581,000 net acres under lease. Twenty-nine percent of the company's proved reserves were located here at the end of 2009. The company is targeting the area with $72 million in capital expenditures in 2009, with additional spending on seismic and land acquisition.

Whiting Petroleum (NYSE:WLL) also has devoted significant resources to the area. With nearly 323,000 acres under net lease, the company plans to spend $205 million at its main field in the area in 2009.

In addition, Marathon Oil (NYSE:MRO) has made progress in developing its acreage in the Bakken Shale. The company produced 8,200 boe/pd off of its properties at the end of 2008. Investors should consider that oil produced from the Bakken Shale trades at a discount to the price realized for West Texas Intermediate (WTI). During its recent conference call, Marathon Oil's management stated that crude produced in the Bakken Shale traded at an $8-9 discount in the fourth quarter of 2008.

One company that has made public a distinction between areas of the Bakken Shale is EOG Resources (NYSE:EOG). The company designates its acreage in the Parshall field as core, and anything outside that area as non-core or the Bakken Light area. Management is currently testing the light area to determine its potential.

Northern Oil & Gas (NYSE:NOG), an almost-pure play in the Bakken Shale, has 70,000 acres. In 2008, the company had a 100% success rate in the area, drilling more 65 wells.

EconomicsAt lower prices than some of the other areas, the Bakken Shale is also economical. EOG Resources stated during its February 2009 conference call that the light area was economical at a WTI price of $50, assuming a well cost of $4.5 million and estimated reserves of 250 thousand to 300 thousand barrels per well.

When Marathon Oil performed its write-down test of reserves at the end of 2008, the company had to write down 8 million barrels of reserves from its Bakken Shale assets because the end-of-year price fell below the WTI price of $45.

Bottom LineThe USGS has called the Bakken Shale the largest "continuous oil accumulation" ever assessed by its agency. Clearly, some in the industry are betting the area will provide a payoff in reserves and production. (Check out our Oil And Gas Industry Primer to learn more about investing in companies such as these.)